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Plenty of recent discussions have broached the issue of which effects resolution measures under BaSAG may have on creditor’s rights, particularly with respect to guarantees that were issued in connection with the relevant liabilities. The following provides an initial overview on the relevant aspects (and potentially different outcomes depending on the concrete security instrument) in such context.

Facts of the case

Even if you have only been following the Austrian financial services sector tangentially over the past few weeks, you were not able to escape the heavily publicized discussions and events in relation to measures taken and (as recent as yesterday) further concretely anticipated by the Austrian Financial Markets Authority (FMA) on the basis of the Austrian Act on the Restructuring and Resolution of Credit Institutions (Bundesgesetz über die Sanierung und Abwicklung von Banken, BaSAG), which came into effect on January 1, 2015, implementing Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms (commonly referred to as the "Bank Recovery and Resolution Directive" or “BRRD”). Without diving into technical details (including arguments pro/contra on whether Heta’s inclusion is consistent/proper with BaSAG’s rationale), the provisions regarding BaSAG measures are generally applicable to HETA Asset Resolution AG (formerly Hypo Alpe-Adria- Bank International AG) (“Heta”), which since October 30, 2014 is no longer a licensed credit institution, according to § 162 para 6 BaSAG.

Following a clear statement by the Republic of Austria that it would not inject any additional capital into, FMA by virtue of its decision from March 1, 2015 (the “Decision”) set the first measure under BaSAG, postponing the maturity of all relevant liabilities of Heta to May 31, 2016. The moratorium extends to all of Heta’s liabilities to the extent the exemptions of § 86 para 2 BaSAG are not applicable.

One of the most relevant exceptions from BaSAG measures from a (bond) creditor’s perspective certainly is the one relating to “secured liabilities”. While the definition of such terms included in Section 2 no 67 BaSAG (using the qualification "particularly") seems to list certain security instruments in a rather exemplary manner, the official commentary (Erläuterungen) to Section 2 BaSAG (which qualifies as interpretation basis with respect to the legislative intent in the case of ambiguities in the law itself) sets forth a clear reference that secured liabilities within the meaning of the provision are such that entitle to separation/segregation from the bankruptcy estate in the event of insolvency. Consequently, it is thus reasonable to conclude that Section 2 No 67 BaSAG is to be interpreted in such narrow manner. While proponents of a wider interpretation continue to note clause 70 of the preamble of BRRD in support of their view, which appears to refer to a rather broad universe of scenarios in which the secured liabilities exception should apply by stating “…It is not appropriate to apply the bail-in tool to claims in so far as they are secured, collateralised or otherwise guaranteed”, both the governing text of BRRD, the BaSAG as well as the official commentary to the BaSAG clearly support the more narrow interpretation outlined above (but there is, however, a fair argument that the relevant statements are not entirely consistent across the board) – on the basis of such narrow interpretation liabilities secured by guarantees and suretyships will not qualify as secured liabilities within the meaning of BaSAG and thus remain subject to BaSAG measures.

Following such train of thought the obviously most relevant question becomes what effect a measure under BaSAG may have on a creditor’s chances to recover its claims from an existing guarantor, such as for example under the deficiency guarantee by the Austrian province of Carinthia (Bundesland Kärnten) issued by way of a state law (“Kärntner Landesholding – Gesetz”, “K-LHG”). In the context of the relevant assessment, the particular guarantee, its scope/wording as well as triggering requirements need to be analyzed on a case-by-case basis, but as general matter it should be noted, for instance, that a guarantor’s obligations under suretyships (Bürgschaften)undertaken in a suretyship agreement or guarantees according to § 1356 of the Austrian Civil Code (ABGB) are accessory (akzessorisch) to the underlying claim(s) such security instrument is designed to secure, i.e. the obligation of the guarantor in such cases depends on the validity and effectiveness of the underlying legal relationship between the debtor and the creditor.

The aspect of a security instrument’s accessoriness to the underlying claim is particularly relevant in the context of the different BaSAG measures: while the moratorium set forth in the Decision from March 1, 2015 obviously does not alter the existence/quality of the underlying liabilities (and therefore also does not affect the creditor’s position vis-à-vis a respective guarantor, albeit that the moratorium does not result in a debtor’s inability to pay, which oftentimes is a requirement for the creditor to validly claim from the guarantor), a potential write-down of an institution’s liabilities in accordance with § 85 para 1 no. 1 BaSAG has the legal effect of being deemed discharged in the amount of the write-down (see § 95 para 2 no 1 BaSAG). It consequently follows that the creditor’s original claim against the institution no longer exists following the application of such bail-in measure and – aside from potential arguments relating the non-existence of trigger requirements under a particular security instrument – this will likely be the main argument for a guarantor under an accessory security instrument to allege that it is under no obligation to pay to the creditor.

I am available at any time to further discuss in more detail these and other substantive or procedural topics relating to BaSAG and its implications.